Contributions published at Department of Economics (Florian Scheuer)

We present a new approach to endogenizing technological spillovers. Firms choose levels of a cost-reducing innovation from a continuum before they engage in competition for each other's R&D-employees. Successful bids for the competitor's employee then result in higher levels of cost reduction. Finally, firms enter product market competition. We apply the approach to the long-standing debate on the effects of the mode of competition on innovation incentives. We show that incentives to acquire spillovers are stronger and incentives to prevent spillovers are weaker under quantity competition than under price competition. As a result, for a wide range of parameters, price competition gives stronger innovation incentives than quantity competition.

We develop a new approach to endogenizing technological spillovers. We analyze a game in which firms can first invest in cost-reducing R&D, then compete on the human-capital market for their knowledge-bearing employees, and finally enter the product market. If R&D employees change firms, spillovers arise. We show that technological spillovers are most likely when they increase total industry profits. We use this result to show that innovation incentives are usually stronger for endogenous than for exogenous spillovers and that endogenous spillovers may reverse the result that innovation incentives are stronger under quantity competition than under price competition. Finally, we explore the robustness of our results with respect to contractual incompleteness and the number of R&D workers.

This paper develops a two-sector general-equilibrium model in which firms in the primary economy have to create workplaces prior to production and product market competition. For this, we introduce the endogenous sunk-cost approach with two-stage decisions of firms from IO in the macro labor literature. By hypothesizing that technological change has lowered marginal costs but has raised nonproduction requirements for providing workplaces, we are able to explain downsizing of low-skilled jobs in the primary economy despite wage flexibility exante. This leads to more accentuated labor-market segmentation, i.e., an increase in wage pressure in the secondary economy.

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Die Kosten unmittelbar vor dem Tod sind ein häufiges Thema in der gesundheitspolitischen Diskussion. Der vorliegende Artikel prüft verschiedene Hypothesen zum Verlauf dieser Kosten und zum Zusammenhang mit verschiedenen Eigenschaften der Verstorbenen. Als Grundlage dient eine statistische Analyse von 14944 Todesfällen.

From the mid-1990s citizens in Belgium, Germany, Israel, the Netherlands and Switzerland have a guaranteed periodic choice among risk-bearing sickness funds, who are responsible for purchasing their care or providing them with medical care. The rationale of this arrangement is to stimulate the sickness funds to improve efficiency in health care production and to respond to consumers’ preferences. To achieve solidarity, all five countries have implemented a system of risk-adjusted premium subsidies (or risk equalization across risk groups), along with strict regulation of the consumers’ direct premium contribution to their sickness fund. In this article we present a conceptual framework for understanding risk adjustment and comparing the systems in the five countries. We conclude that in the case of imperfect risk adjustment—as is the case in all five countries in the year 2001—the sickness funds have financial incentives for risk selection, which may threaten solidarity, efficiency, quality of care and consumer satisfaction. We expect that without substantial improvements in the risk adjustment formulae, risk selection will increase in all five countries. The issue is particularly serious in Germany and Switzerland. We strongly recommend therefore that policy makers in the five countries give top priority to the improvement of the system of risk adjustment. That would enhance solidarity, cost-control, efficiency and client satisfaction in a system of competing, risk-bearing sickness funds.

We set up a model, in which firms in a small industrialized country outsource part of their production to a foreign economy, which is rich in low-skilled labour. We analyse, how a decline in trade costs affects outsourcing activities and the production structure in the small economy. A stimulation of cross-border outsourcing raises wage dispersion and, if labour markets are unionized, also the employment of high-skilled relative to low-skilled labour. Using a panel of Austrian industries, we find, first, that decreasing trade barriers - as observed after the fall of the Iron Curtain - indeed stimulate outsourcing to Central and Eastern Europe and the former Soviet Union, and, second, that outsourcing to these countries significantly shifts relative employment in favour of high-skilled labour.

We set up a partial equilibrium model of Cournot competition, where firms can strategically choose their outsourcing intensity. This decision is based on a trade-off between lower marginal production costs and higher fixed costs. In this model, a lower number of identical firms leads to higher market concentration and higher outsourcing activities. The theoretical hypothesis of a positive correlation between market concentration and international outsourcing is confirmed by rank correlation coefficients and a fixed effects panel data analysis using data on the intermediate goods imports to output ratio and market concentration in the EU12 countries. In the fixed effects regression analysis we show that market concentration has to be treated as an endogenous variable to avoid biased and inconsistent estimates.

In Switzerland the new law on health insurance, effective since 1996, introduced pro competitive changes in the market of sickness funds. The legislator expected high mobility between sickness funds of both healthy and sick insured as open enrolment was introduced with the new law. That is why the risk adjustment scheme, that was already introduced 1993, was limited until 2005. However, consumer mobility remained low and risk selection strategies are still profitable, since risk-adjustment is based only on demographic variables. This paper describes risk adjustment, consumer mobility, risk selection activities of sickness funds and the impact of imperfect risk adjustment on the development of HMO and PPO models. The paper concludes with a description of the current political and scientific discussion in Switzerland.

We explore the impact of non-collusive corruption on factor rewards and on the wealth distribution. We show that the distributional consequences depend crucially on the degree of capital market imperfections. With perfect capital markets, corruption does not redistribute wealth within the private sector. However, if borrowing is limited, members of the ''middle class'' suffer most since bribery drives them out of the capital market. This in turn makes access to credit easier for relatively wealthy individuals such that a group of them even wins. So, the interest of the latter in overcoming a corrupt regime may be very limited. In the empirical section, we provide cross-country evidence showing that a high level of corruption and a polarization in the income distribution go indeed hand in hand.

Present anti-terrorist policy concentrates almost exclusively on deterrence. It seeks to fend off terrorism by raising the cost of undertaking terrorist acts. This paper argues that deterrence policy is less effective than generally thoughtnand induces in some cases even more terrorism. This is, in particular, the case if deterrence policy induces a centralisation of decision-making in the polity and economy. Therefore, an effective anti-terrorist policy should focus more on reducing the expected benefits of terrorist acts to prospective terrorists. Such a policy is based on strengthening rather than weakening decentralised decision-making.

Deterrence has been a crucial element in fighting terrorism, both in actual politics and rational choice analyses of terrorism. But there are superior strategies to deterrence. One is to make terrorist attacks less attractive. Another to raise the opportunity cost – rather than the material cost – to terrorists. These alternative strategies effectively dissuade potential terrorists. The strategies suggested here build on the “benevolence” system and tend to produce a positive sum game among the interacting parties. In contrast, the deterrence system is based on “threats” and tends to produce a negative sum game interaction.

We provide a cultural explanation to the phenomenon of corruption in the framework of an overlapping generations model with intergenerational transmission of values. We show that the economy has two steady states with different levels of corruption. The driving force in the equilibrium selection process is the education effort exerted by parents which depends on the distribution of ethics in the population and on expectations about future policies. We propose some policy interventions which via parents' efforts have long-lasting effects on corruption and show the success of intensive education campaigns. Educating the young is a key element in reducing corruption successfully. Journal of Economic Literature Classification Numbers: D10, J13.

We examine experimentally how Chief Executive Officers (CEOs) respond to incentives and how they provide incentives in situations requiring trust and trustworthiness. As a control we compare the behavior of CEOs with the behavior of students. We find that CEOs are consider-ably more trusting and exhibit more trustworthiness than students-thus reaching substantially higher efficiency levels than students. Moreover, we find that, for CEOs as well as for students, incentives based on explicit threats to penalize shirking backfire by inducing less trustworthy behavior-giving rise to hidden costs of incentives. However, the availability of penalizing incentives also creates hidden returns: if a principal expresses trust by voluntarily refraining from implementing the punishment threat, the agent exhibits significantly more trustworthiness than if the punishment threat is not available. Thus trust seems to reinforce trustworthy behav-ior. Overall, trustworthiness is highest if the threat to punish is available but not used, while it is lowest if the threat to punish is used. Paradoxically, however, most CEOs and students use the punishment threat, although CEOs use it significantly less.

The evidence from many experiments suggests that people are heterogeneous with regard to their abilities to make rational, forward looking, decisions. This raises the question when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and important economic problem - the adjustment of nominal prices after an anticipated money shock. Our experiments show that when agents' actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment lasts very long and is associated with relatively large real effects. This adjustment difference occurs because price expectations are very flexible under substitutability and very sticky under complementarity. Our results suggest that strategic complementarity does not only provide incentives for the rational types to partly mimic the behavior of the boundedly rational types butnit also renders people less rational and forward looking. In addition, underncomplementarity people attribute less rationality to the other players.

In this paper, we suggest a novel approach to program evaluation that allows identification of the causal effect of a training program on the likelihood of being invited to a job interview under weak assumptions. The idea is to measure the program-effects by pre- and post-treatment data that are very close in time for the same individual. Our approach provides useful information on both, average effects of the program as well as information on the effects of the program for each individual. Evidence on individual treatment effects is helpful as it can be used to improve the targeting of programs.

We show that Gul and Pesendorfer’s [Econometrica 69 (2001) 1403] representation result for preferences with temptation and self-control can be reexpressed in terms of a costly intrapersonal conflict between a Planner and Doer, as in Thaler and Shefrin [J. Political Econ. 89 (1981) 392] and psychologists’ standard view of self-control problems.

We study indirect reciprocity and strategic reputation building in an experimental helping game. At any time only half of the subjects can build a reputation. This allows us to study both pure indirect reciprocity that is not contaminated by strategic reputation building and the impact of incentives for strategic reputation building on the helping rate. We find that while pure indirect reciprocity appears to be important, the helping choice seems to be influenced at least as much by strategic considerations. Strategic do better than non-strategic players and non-reciprocal do better than reciprocal players, casting doubt on previously proposed evolutionary explanations for indirect reciprocity.

Public choice theory takes citizens as rationally ignorant about political issues, because the costs of being informed greatly exceed the utility individuals derive from it. The costs of information (supply side) as well as the utility of information (demand side), however, can vary substantially depending on the political system under which citizens live. Using survey data from the European Union and Switzerland, we present empirical evidence that citizens are politically better informed when they have more extended political participation rights. The results corroborate theoretical arguments and circumstantial evidence that voter information should be treated as endogenously determined by political institutions.